What did Moody’s mean?

Here’s what I’ll tell you but no offense please… Moody’s said, “I would have done this eventually. Never mind the reason why” It’s almost impossible to figure out what Moody’s meant by its press release. Let’s at least look at the main idea in the statement:

Last week Moody’s has both downgraded Turkey’s credit rating to B1 and cut outlook on Turkey to negative. Another cut to sovereign credit rating is very likely to happen soon. Turkish country risk was already too high, now we’re about to hit bottom.

“Recent cut to Turkey’s ratings reflects the fact that the balance of payment crisis still continues. Turkey’s fragility against economic and financial volatility unfortunately remains intact. Fall in Turkey’s foreign currency reserves doesn’t match the CBRT’s long-time policy that allows a floating exchange rate as well as the bank transparency and independence.”

No offense but this statement has no meaning at all. Current account deficit keeps shrinking due to negative growth, let alone there’s no crisis going on in Balance of Payments.

I would acknowledge Moody’s to be right if they meant the following: “Structural fragilities in Turkey’s balance of payments still remain unchanged. Once these fragilities start to grow again, Turkey’s current account will grow with it. This situation may take place even earlier than thought if energy prices go up.” Nevertheless, I should mention that if a structural problem did not cause any deterioration, then Turkey should not have been subject to a rating downgrade.

Decline in CBRT reserves, thus giving rise to a contradiction with floating exchange rate policy, is not the right approach either, as a matter of fact, irrelevant. A country’s reserves may decline when floating exchange rate regime is in force.
Using reserves to calm the exchange rates down, thus trying to balance the economic parameters out doesn’t need a floating exchange rate regime to work anyway.

Unless they meant: “CBRT is saving reserves using non-transparent methods, even trying to increase its reserves using entrusted foreign currency. Similarly, CBRT gives it to the public in a manner that is not transparent again. And the Public Institutions sell foreign currency to markets, the foreign currencies they received from Central Bank under non-transparent conditions with the purpose of easing the exchange rates. Not to mention these foreign currencies are borrowed from foreign markets in exchange for Turkish Lira.”

“Moody’s is doing what it’s told as it always did…”

This is a serious allegation indeed. Let’s assume for one second that it is true: So, does Moody’s mean that it would be wiser to let the free floating exchange rates hit record highs through free float? Or is Moody’s telling that the government must force those who previously bought foreign currency at low levels during CBRT and Public interventions to sell at high levels?

I think Moody’s is suggesting neither of the above. If they did, it would be both strange and inappropriate. What is Moody’s trying to say then? Well, nothing meaningful… If it is trying to suggest what I mentioned earlier above, it should have voiced it last month. We all know that the CBRT increased its reserves through SAWP operations and gave foreign currency in exchange for TRY to cover public institutions payments. CBRT accepts not only public requests, but institutional requests as well. There’s contradictory about this, especially with floating exchange rate.

I think Moody’s is trying to say that “I should have done this a long time ago. Never mind the reason why”. It’s already impossible that Turkey’s credit rating remains at “investable levels” under the circumstances. But is it really fair that it remains at such low levels? I think it’s not because ratings downgrading or upgrading are carried out in accordance with certain realized situations rather than expectations.

In short, Moody’s made its decision in the exact same manner as it did its previous ones. As I’m sure that these agencies are doing what they’re told when it comes to downgrading or upgrading countries’ credit outlook, I will say no more.